What happened
Shares of Verizon (VZ -0.47%) fell as much as 3.3% in trading on Friday as the market faces pressure from the continued increase in interest rates. At 3:30 p.m. ET, shares were down 1.1%, still well behind the S&P 500's gain of 1.3% for the day.
So what
Verizon continues to battle rising interest rates, and the U.S. 10-year government bond yield was up 6 basis points to 4.78% today. This continues a long streak of increases, not only this week, but also over the past year.
There are two reasons interest rates are important for Verizon. One is the company's $182 billion in debt, which will ultimately need to be refinanced at higher rates than the company currently has.
The second is investors have other high-yield options for their money. If 10-year bonds are paying 4.8%, investors need a premium to take on risk with a company like Verizon. Verizon stock's current yield of 8.6% is high, but is only a 3.8% premium to the "risk-free" rate.
Now what
Despite the change in bond yields, I think Verizon now faces more operational questions that will determine the stock's future. Investors are concerned that revenue is stagnant and margins will come under pressure, hurting cash flow. But in the last two quarters, we have seen a big upswing in free cash flow as investment in the 5G network falls and operational cash flow increases.
Third-quarter 2023 results, which are due out on Oct. 24, will tell investors if the company's cash flow continues to trend in the right direction, and the stock may be tied to bond yields until then.
